What's the best way to minimise Proton's losses?

Global brand: What Proton needs is a foreign takeover that can help it transform into a global brand, according to an analyst.

PETALING JAYA: DRB-Hicom Bhd set tongues wagging last week when news came out that it was considering selling off its entire stake in national carmaker Proton Holdings Bhd to external investors.

The news clearly piqued investor interest, which resulted in the company’s shares hitting a seven-month high last Monday. The stock peaked at RM1.24 per share before paring down the gains to close at RM1.16.

While the news of the 100% disposal were quickly dismissed by DRB-Hicom, the writing on the wall was clear from the brief share price hike... do away with Proton.

Proton has been a drain on DRB-Hicom’s earnings. The diversified conglomerate recorded a net loss of RM790.76mil for the fourth quarter ended March 31, 2016 from a net profit of RM89.8mil in the corresponding quarter of last year on the back of the poor performance of automobile manufacturer Proton’s lower vehicle sales, volatility in foreign exchange rates and weak consumer sentiment.

So, the question is, why not just do away with Proton and cut your losses?

Well, it’s not that easy, said one industry observer who chose to remain anonymous: “Proton was not just created to be a car company – it was started to improve the engineering capabilities of the country. After more than three decades, that objective has not changed.”

He pointed out that after all these years, the Government was still committed to maintaining that goal.

“The RM1.5bil conditional soft loan granted to Proton came with conditions – among them being that it has to identify a strategic and renowned partner that will assist in research and development for it to become a global player within a year.

“What’s going on now, with the loan, is that it is just a continuation of what the Government wants to see happen to Proton.”

Another industry observer points out that it is “not in our nature to dispose off something of national value.”

“If you look at our national airlines, Malaysia Airlines Bhd (MAS), it was bleeding, but we did not sell it to external or even foreign investors. What we did was restructure it.

“The same would be for Proton. At most, we would see a restructuring or a strategic partner. It just wouldn’t make sense to sell it off, otherwise, the idea of a national carmaker would be nullified. It would just end up being a business entity of a foreign company.”

He said selling off the entire stake in Proton would defeat the primary objective of setting up the car company in the first place – which was to uplift the country’s engineering capacity.

Still, that was over 30 years ago. Surely, Proton’s creators imagined it being a thriving, successful car company and not an ailing one today.

Proton has been losing market share year after year. According to statistics by the Malaysian Automotive Association, its market share dropped to 13% on sales of 35,727 units in the first half of 2016, compared with a market share of 15.6% and 50,205 units sold in the previous corresponding period.

According to its audited financial statement for financial year 2015, the company’s net loss widened to RM646.3mil from RM461.6mil previously. Its distribution cost of RM260.7mil was more than its gross profit of RM147.9mil in 2015.

Indeed, the argument for DRB-Hicom to dispose of its 100% stake in Proton cannot be any more compelling.

But Proton has always been more than just a car company, said one industry observer.

“Just like the situation with MAS, the Government is not known to just sell loss-making companies to foreign entities – especially when that entity has national value.

“Both MAS and Proton are symbols of our nation’s pride – and we don’t just sell off our pride.”

Another industry observer, who reckoned that Proton should be sold off to minimise, if not reduce, DRB-Hicom’s losses, pointed out that there were historical incidences of automotive companies achieving success after being sold to foreign entities.

“A classic case in point is when British brand, Mini, was taken over by German giant BMW. Today, Mini is still carrying on under British and German management.

“We saw German technology and knowhow being injected into British heritage. Something like this could work for Proton. It won’t necessarily lose its identity as everyone fears.”

Many car companies have been consolidated over the course of history – such as General Motors (Chevrolet, Buick, GMC, Cadillac, Holden, HSV, Opel, Vauxhall, Wuling, Baojun, Jie Fang, and Ravon); and Volkswagen (Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat and koda).

However, an analyst said Proton had not exactly had a “rich heritage” the likes of giants such as Mini or even Bentley.

“Those are iconic marques that go back a long way and has had a lot of value to be built on. Unlike those brands, which have global markets, Proton is, by and large, a domestic brand. Yes, Proton cars are sold overseas but their numbers are small.”

“What Proton needs is a foreign takeover that can help it transform into a global brand. However, I don’t see that happening for now.”

Among Proton’s export destinations are the United Kingdom, South Africa, Australia, Singapore, Brunei, Indonesia, Nepal, Sri Lanka, Bangladesh, Taiwan, Cyprus, Mauritius and the Middle East.

As maintained by DRB-Hicom, the company has no intention of selling off Proton. In dispersing the disposal rumours, DRB-Hicom clarified that it remained committed to holding a substantial and strategic stake in Proton and remained confident of the carmaker’s turnaround.

“It must be highlighted that as part of the requirement of the RM1.5bil loan granted by the Government, Proton is currently undertaking a request for proposal exercise seeking a partner for Proton which can provide a strategic, operational and cultural fit on a permanent basis, with the intention of growing its automotive business.

“This exercise is expected to be completed in the first quarter of 2017 and its implementation is being overseen by the Task Force Committee formed by the Government to monitor the turnaround of Proton,” DRB-Hicom said in a filing with the stock exchange last Monday.

The loan in question was provided to Proton as part of a conditional share subscription agreement that was announced in June as a cash injection for the loss-making carmaker.

Under the arrangement, the Government agreed to subscribe to 1.25 billion new redeemable convertible cumulative preference shares (RCCPS) at an issue price of RM1 each.

Should the RCCPS be fully converted, the Government would end up owning a 79.28% stake in Proton. This potential outcome could prove to be a stumbling block should DRB-Hicom choose to arrange a deal with outside investors.

As part of the RCCPS subscription agreement, Proton is currently seeking a strategic partner who will assist in research and development to restore its competitiveness in Malaysia’s automotive industry.

According to the agreement, parties involved in the agreement will seek alternative solutions should Proton be unable to find a partner by June next year.

In its report, RHB Research Institute noted that efforts to rehabilitate Proton “are gathering pace.”

“A number of potential strategic investors have been invited to submit proposals that could involve equity participation.”

It adds that “newsflow” will be positive in the next several months, with four new product launches scheduled.

“While the market has reacted positively to the recent launch of the Perodua Bezza sedan, Proton will launch a slew of new product offerings beginning with the Persona sedan later this month.”

This will be quickly followed by the Saga (A/B segment sedan) in September and a multi-purpose vehicle in October (the first product of the joint venture with Suzuki).

“A sports utility vehicle based on the Suzuki Vitara is scheduled in the first quarter of 2017. These new product offerings will freshen Proton’s model line-up and appeal to a wider range of potential customers,” says RHB.

Also looking up for Proton is that its loss-making, wholly-owned subsidiary Group Lotus plc is on track for a turnaround.

According to reports, citing chief executive Jean-Marc Gales, Lotus is on course to make profit in its next financial year for the first time in its 68-year history.

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